Dubai: The long shadow of the Gulf unified currency, and its broken policy framework, is worrying analysts and highlights how fractious feelings can get in the forthcoming GCC Summit in Abu Dhabi.
GCC policy makers have become more sceptical and are raising questions about having a GCC single currency when the political will of a project of such magnitude seems to be lacking.
The six members of the Gulf Cooperation Council (GCC) Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE planned to introduce a single currency by 2010 and several steps have already been taken.
However, the past year has been marked by doubts over the project and its scheduled deadline.
Forming the Gulf monetary union has several associated benefits: being better prepared for globalisation challenges, lowering of transaction costs, boosting cross-border trade and financial transactions, sustaining diversification, improving risk perception and bolstering foreign investment.
The monetary union is perfectly feasible. The Gulf countries could constitute a currency zone considerably more optimal than the Eurozone countries did, or even do today, after more than half a century of integration.
The reasons are: convergent productive structures, a comparable degree of external trade openness, linguistic and cultural homogeneity favouring labour market flexibility. The Gulf countries already have a strong economic and financial convergence after being anchored to the US dollar for more than 20 years.
Additional efforts
At the cost of some additional efforts — relevant convergence rules, wiser budget policies — the Gulf countries will be in a position to achieve a monetary union and ensure its viability over time.
The monetary union is far from being only a matter of economics. As with the Eurozone, operating the proposed single currency also hangs on the ability to concede transfers of sovereignty and to set both credible and legitimate supranational institutions.
However, the UAE last year announced its withdrawal from the monetary union due to disagreement over the location of the future Gulf Central Bank. The process has since been delayed.
Saudi Arabia claimed that it would host the Central Bank for which the UAE had already bid. The withdrawal of the UAE — the region's trade gateway — from the monetary union was the biggest setback the group had faced since its formation nearly three decades ago.
Oman had earlier pulled out of the plan. However, Bahrain, Kuwait, Saudi Arabia and Qatar have remained committed to it.
In 2007, Kuwait cut its currency loose from the US dollar, preferring to float its dinar against a basket of currencies. The Kuwaiti move put it at odds with the other Gulf states, which peg their currencies to the dollar.
There is also no consensus on the technical details, including the type of currency, payment settlement systems, banking supervision regulations and exchange rate policy.
With the exception of Kuwait, all GCC currencies are pegged to the US dollar, which could ease the path to the monetary union and avoid integration problems.
Yet not all agree a continued peg to the dollar is a good thing for the region because of risks. Mohammad Bin Obaid Al Mazroui, GCC assistant secretary-general for economic affairs, believes that the road to the gulf monetary union is not smooth.
No further progress
"There will be no further progress in the monetary union project in the forthcoming summit in Abu Dhabi and the lack of an agreement may dent confidence in the future single currency," he told Gulf News. According to him, it will take more than money and economic integration to make the monetary union happen.
While Al Mazroui declined to say if another country would be opting out of the union, he said, "The exit of UAE undermines the unified currency project. However, the UAE decision doesn't diminish the overall viability of monetary union and there are persisting efforts to bring [the] emirates back to the union. We need a monetary union that will support the maturing process of our economics for this to be achieved, the right structure and rules must be clearly in place from the outset and all members must take equal responsibility for its success," Al Mazroui added.
Gulf countries cannot achieve a monetary union without the participation of the UAE, the region's second biggest economy, a top official said, in an apparent attempt to get the country back into the union.
"Without the UAE, the necklace [the Gulf Monetary Union] will not be complete," Abdul Rahman Bin Hamad Al Attiyah, GCC Secretary-General said a few weeks ago in Dubai.
Dr Mohammad Ramady, professor of Finance and Economics at King Fahd University of Petroleum and Minerals, said: "The intentions towards [a] unified GCC currency are good but the devil is in the details and the results to date have been uneven due to many factors ranging from minimal inter GCC trade to agreeing on a common currency peg and even the role of the GCC as a new international bloc."
Pointing to the challenge, he added that it is not just lack of political will but differences in size among the different economies of the GCC and the power the bigger ones wield on the smaller members.
UK model
Wondering if the union can go ahead without the UAE, he said: "It can be completed without the UAE as the UK model with the EU and the euro can demonstrate as Britain is a member of the EU but not within the euro. The UAE's presence in the broader monetary union — customs, tariffs, harmonisation — is far more important for the time being than in being part of the common currency."
However, Ramady predicted that in the coming summit the common currency is probably on hold and given the international nervousness about global currency issues, no GCC decision will be made.
What the GCC summit will do is resolve outstanding tariff and common customs issues on inter GCC trade and the private sector is now more involved to try to resolve these issues.
In terms of currency peg to dollar, he said: "It is not necessary as Kuwait is still heavily pegged to the dollar but not exclusively and it is to the benefit of the remaining dollar pegged GCC countries to evaluate the performance of the Kuwaiti economy and its partial de- linking from the dollar so as to assess Kuwait's success in fighting imported inflation from non dollar sources".
